Quality Misallocation, Trade, and Regulations
Luca Macedoni and
No 9041, CESifo Working Paper Series from CESifo
Recent trade agreements have shifted their focus to non-tariﬀ barriers such as regulations and product standards, which have been traditionally treated as pure domestic policies. The imposition of such standards reallocates production from small to large, high quality ﬁrms. We model regulations as a ﬁxed cost that any ﬁrm selling to an economy must pay, consistent with stylized facts that we present. The ﬁxed cost improves allocative eﬃciency, by reallocating production towards high-quality ﬁrms, who under-produce in the market allocation. Furthermore, the ﬁxed cost generates a positive externality on the rest of the world as it induces entry of high-quality ﬁrms, but unilateral regulation lowers the terms of trade of the imposing country. The result justiﬁes international cooperation based on the fact that such cooperation can improve welfare, rather than preventing negative consequences of tariﬀ wars. We estimate our model and apply its gravity formulation to quantify the welfare consequences of imposing the optimal regulation, the extent of the positive externalities across countries, and the eﬀects of cooperation.
Keywords: allocative efficiency; regulations; quality standards; variable markups; trade policy (search for similar items in EconPapers)
JEL-codes: F12 F13 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-int
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